NCPA - National Center for Policy Analysis


March 29, 2005

Congressman Martin Sabo (D-Minn.) believes that raising the interest rate (after inflation) on special-issue bonds in the Social Security Trust Fund from 4.1 percent to 4.7 percent will solve the program's financial problems. However, the Heritage Foundation's David John says it will do no such thing.

After all, says John, the trust fund is not filled with high-grade stocks and bonds that are carefully managed to produce income. Instead, it is filled with nothing but IOUs -- promises to use other federal tax money to pay Social Security benefits when the baby boomers retire:

  • Starting in 2018, the Treasury is going to have to pay off the IOUs by giving Social Security money from other taxes.
  • By 2022, those payments will reach over $100 billion a year (in today's dollars without inflation); by 2027 they will reach $200 billion a year.
  • The annual cost to fund Social Security continues to rise after that.

Thus increasing the interest rate only increases the amount of IOUs, but this has no bearing on the government's ability to fund the shortfalls (after 2018) when Social Security begins to pay out more in benefits than it takes in, says John.

Source: David C. John, "Raising Returns on Trust Fund Bonds: Simple, Easy To Explain, and Completely Wrong," Heritage Foundation, March 17, 2005.


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